Buying a Business UK: How to Buy an Exisiting Business

Nowadays, people dive into any investment opportunity that presents itself, but only a very few have the knowledge of what I’m about to share with you. Buying an already existing business in the UK could be one of the major investments a person can make with the sure expectation of a reasonable dividend. You don’t necessarily need to build a business from scratch.

There are lots of promising small businesses out there in the UK. All you just need is an insight on which business to buy into, even if it means getting a loan and buying it. This post is here to provide you with insight on buying into that seemingly small business in the uk. So, join us as we set the ball rolling.

Overview 

Starting from the ground up is not the only way to get started. Buying an existing business can help you get off to a good start. Most people envision establishing a business from the ground up, generating their own ideas, and building the firm from the ground up. However, starting from scratch has some clear difficulties, such as the difficulty of creating a customer base, marketing the new business, hiring personnel, and establishing cash flow—all without a track record or reputation to fall back on.

Buying an existing business is usually less hazardous than starting from scratch. When you purchase a firm, you are taking over an operation that is already producing cash flow and profits. You have a well-established customer base, a good reputation, and workers who are well-versed in all facets of the business. And you don’t have to reinvent the wheel by establishing new procedures, methods, and rules when a successful company formula has already been established.

On the flipside, buying a business is frequently more expensive than starting one from scratch. However, a loan for the purchase of an existing UK business is easier to obtain than financing for the start-up of a new one. Bankers and investors are often more comfortable dealing with a company that has a track record. Furthermore, buying a business in the UK may provide you with significant legal rights, such as patents or copyrights, which can be extremely beneficial. Of course, there is no such thing as a 100 percent thing, and buying an existing business is no different. If you’re not careful, you could end up with obsolete merchandise, disgruntled personnel, or out-of-date distribution techniques.

Buying a Small Business UK

Choosing the proper type of business for you in the UK is the first step in buying the ideal business. The best place to begin is with an industry that you are both familiar with and understand. Consider the different types of businesses you’re interested in and which best match your abilities and experience. Consider also, the size of the company you want in terms of personnel, locations, and sales.

Next, determine the geographical area in which you intend to operate a business. Examine the labor pool and the costs of conducting business in that area, including wages and taxes, to ensure they are acceptable to you. When you’ve already decided on a region and an industry to focus on, look into every business in the area that fulfills your criteria.

Begin by looking in the classified section of your local newspaper for “Business Opportunities” or “Businesses for Sale.” You can also create your own “Want to Buy” ad stating what you want. Remember that just because it’s a small business or isn’t listed doesn’t mean it’s not for sale or not worth buying.

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The preliminary analysis

Whether you employ a broker or go alone, you’ll want to assemble an “acquisition team” of your banker, accountant, and attorney to assist you. These consultants are critical in what is known as “due diligence,” which is the process of evaluating and verifying all pertinent information about the business you are buying . When you conduct due diligence, you will know exactly what you are purchasing and from whom. 

The preliminary analysis begins with several fundamental questions, for example, Why is this business for sale? What is the general view of the industry and the specific business, and what is the future outlook? Does the company have a large enough market share to be profitable? Are raw materials in plentiful supply required? What changes have occurred in the company’s product or service lines over time?

You must also evaluate the company’s reputation as well as the strength of its business relationships. Inquire with current customers, suppliers, and vendors about their interactions with the company. Check with the Better Business Bureau, industry associations, and licensing and credit-reporting agencies to ensure that no complaints have been filed against the business in question 

You can finance the buying of a business through loan

The financing of an existing firm differs from the financing of a new one. Since an existing firm has a track record of success, money for this form of investment is frequently easier to come by than for a brand-new startup. You may require a loan to cover all or part of the initial acquisition price when buying an existing business. SBA loans, bank loans, seller financing, and internet choices like Fundera and Lendio are just a few of the small business loan options available.

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#1. Seller financing

In many cases, the person that you’re buying the business from will give you a loan that you may repay over time with the income you produce from the firm. This makes the move go more smoothly without exhausting your bank account.

#2. Bank loan

Traditional bank loans, particularly for business acquisitions, can be difficult to obtain. You won’t be able to get this loan on your own unless the business you intend buying has significant assets and you have a good credit score and track record.

#3. Assumption of debt

With this type of loan, you’re essentially buying both the assets and liabilities of the business. To put it another way, you might take on existing debt. You’ll almost always require debtors’ permission to do so.

#4. SBA loan

If you can’t get a bank loan, this is your best option. According to Commercial Capital, an SBA 7A loan “provides guarantees and safety measures for banks, who, in turn, can loan you money to fund acquisitions.” The guidelines are typically minimal, though the bank can add its own.

#5. Leveraged buyout

In the end, this entails using part of the company’s assets to aid with the purchase. Although, this is rarely the main source of money, and it is frequently supplemented by loans or seller financing.

To figure out which option is best for you, think about how much you’re willing to invest and risk, as well as what makes the most sense for you and your enterprise. For example, if the company has a good track record and you have a strong credit history, you could apply for a bank or SBA loan. Seller financing, on the other hand, may be a more viable option for someone deficient in such skills. Regardless, if your first choice falls through, you can always investigate other possibilities.

Things to know before buying into a business

When buying an existing business, there are critical aspects you must evaluate before making a decision to buy. The following are the important areas 

#1. Make an inventory

Inventory checks are among the evaluations that influence your decision when buying a business in the UK. During any inventory examination, you or a trained representative must be present. You should be aware of the state of inventory, including what is currently on hand as well as what was on hand at the conclusion of the previous fiscal year and the one before that. You should get the inventory assessed as well. After all, this is a solid asset to which you must assign a monetary value. 

Check the inventory for salability as well. What is its age and level of quality? What is its current state? Keep in mind that you don’t need to accept the value of this inventory; it’s negotiable. If you believe it is not in line with what you want to sell or is incompatible with your target market, then bring it up in negotiations.

#2. Statements of financial position for the last five years

Compare these statements to their tax returns, including all books and financial records. This is very significant for calculating the business’s earning power. The sales and operating ratios should be checked by an accountant who is knowledgeable with the type of business you are buying.

#3. Sales pattern

Although revenues will be accounted for in the financial accounts, you should additionally review the monthly sales data for the previous 36 months or more. If it involves many products, segment sales by product categories, as well as cash and credit sales. This is a useful measure of present business activity and provides some insight into the business’s potential cycles.

Contrast what you see in the business with the industry norms for seasonal patterns. Obtain the sales data for the top ten accounts for the last 12 months as well. If the seller does not wish to share his or her most important accounts by name, assigning them a code is acceptable. You are only concerned with the sales pattern.

#4. Customer pattern

Part of the considerations to look into when buying a business is the customer behavior. If the business is the type that can track clients, you will want to know certain features of present customers, such as: How many of them are first-time buyers? How many customers have you lost in the last year? When are the busiest seasons for current customers to buy? What is the most popular type of merchandise?

#5. The company’s reputation

The company’s image in the eyes of consumers and suppliers is critical. As previously said, a company’s image can be an advantage or a liability. To determine the reputation of the business, interview customers, suppliers, and the bank, as well as the owners of other businesses in the region.

#6. Seller-customer relationship

Generally, businesses operate for the primary aim of impressing customers while profiting from their patronage. It is safe to say, thus, the more customer a business has, the more relevant it becomes. When buying a business, you must determine whether any of the customers have any unique ties to the current owner of the business.

Find out how long any such account has been with the company. What proportion of the company’s revenue is accounted for by this specific customer or group of customers? Will this consumer continue to do business with the company if the ownership changes?

#7. Return on investment (ROI)

The most typical way to evaluate a business is to consider its return on investment (ROI), or the amount of money the buyer will make from the business after debt payment and taxes.

However, don’t mix up ROI and profit. They are not synonymous. The amount of the business is the ROI while profit is a criterion by which the business’s performance is judged. A small business should typically return between 15 and 30 percent of its investment. This is the average net after-tax income.

#8. Insurance

Determine what type of insurance coverage is in place for the operation of the business and all of its properties, as well as who the underwriter and local company representative are,and the rates too. Some firms are underinsured, putting them in potentially devastating conditions in the event of a fire or a significant disaster. If you enter an underinsured operation, you could lose everything if a major loss occurs.

#9. Accounts receivable

Accounts receivable are cash-based claims that are expected to be collected. It reflects money owing to the company by entities for the sale of goods or services on credit. When buying a business, consider breaking the accounts receivable down into 30-day, 60-day, 90-day, and beyond increments. It’s crucial to check the age of receivables because the longer they’ve been outstanding, the lower the account’s value becomes. Additionally, make a list of your top ten accounts and investigate their creditworthiness. 

Accounts receivable are normally executed in most commercial entities by issuing an invoice and either mailing or electronically delivering it to the client, who must then pay it within a set timeframe, known as credit terms or payment terms. If the clientele is creditworthy and the majority of the accounts are past due for more than 60 days, a stricter credit collection policy may help to accelerate receivables collection.

#10. Accounts payable

Accounts payable is a type of credit offer from suppliers to its clients that allows them to pay for a product or service after receiving. Like accounts receivable, it should be divided into 30 days, 60 days, and 90 days. This is crucial in establishing how well the company’s cash flows. Check to discover also, whether any creditors have placed a mortgage on the company’s assets on payables that are more than 90 days old.

#11. Debt disclosure

On the list of things to consider when buying your UK business, debt disclosure is important. This contains any outstanding notes, loans, or other debt that the company has promised to pay. Examine the books to see if there are any business investments that may have occurred outside of the typical area. Take a look at the amount of money lent to clients.

The benefits and drawbacks of buying a business

Buying an existing business rather than starting one from scratch has numerous advantages, but it is not without risks too. You must understand the benefits and drawbacks of buying an existing business and be confident in your ability to run one.

Benefits of buying a business UK

Buying a business is believed to be less dangerous than establishing one, especially if you can find a well-managed, productive business for a reasonable price. Consider the following benefits:

• There is already a table market for your product or service.
• Existing employees and managers will be able to share their knowledge.
• The difficult part of the start-up has already been completed. 
• Plans and procedures are already in place for the company.
• Purchasing an existing business ensures immediate cash flow.
• The business that you’re buying will have a financial history, which will give you a sense of what to expect and make obtaining a loan and attracting investors easier.
• Already existing customers, contacts, goodwill, suppliers, staff, plant, equipment, and stock.

Disadvantages

Remember that not every business on the market is a smart investment. Many owners will be selling enterprises that are unproductive or underperforming. While this may be an opportunity to purchase and expand a low-cost firm, it is also a dangerous investment. Consider the following drawbacks:

• The company’s antiquated machinery and equipment may require significant upgrades.
• You will almost always need to put down a considerable sum of money up front, as well as budget for professional costs such as those charged by solicitors and accountants.
• The company could be in a lousy location or be poorly managed, with low employee morale.
• External variables can have an impact on future growth, such as increased competition or a decreasing sector.
• To turn around underperforming enterprises, a significant amount of capital may be required.
• The personality of the seller and their established ties may be a big element in the company’s success.

Summary

Starting a business from scratch isn’t exactly a bad idea. However, buying into an already existing business comes with it’s own benefits as seen in the post. Loan options are also available to assist you in buying into whatever business you chose. Meanwhile, it is important that you do a background check on the business. 

Since you’re not beginning your own business but rather buying an existing one, you must ensure that you are well-versed in all aspects of the business. You don’t want to invest in a business that has skeletons in its closet. You also don’t want to discover after you’ve bought the company that you’ve ignored critical aspects of it.

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